COVID-19 and real estate: what now for the office?

COVID 19 has been celebrated as the death of the office, but it could simply be another iteration in for a commercial property sector already used to downsizing, hotdesking, coworking, open-planning and decentralising. How will property perform once lockdowns lift?

From teaching to television reporting, the running of businesses to the running of governments — the world has had a crash course in working from home.

COVID-19 has forced many businesses to embrace remote working, with video calls replacing meetings and couches subbing in for standing desks.

And while it hasn’t been easy, it has proved possible, leading to suggestions that 2020 marks the beginning of the end for the office.

Why lease commercial premises, or require teams of people to commute through congested cities, if the work can be completed from the comfort of their own homes?

But it’s not the first time the death of the office has been foretold.

It was back in the mid-1970s that NASA specialist Jack Nilles looked at the potential of electronic communication and coined the term ‘telecommuting’ — predicting that within a decade or two society would see the advantages of reduced commuting time, happier employees and a reduction in consumption of fuel.

Then came downsizing, a trend that saw the average space per US worker fall from an incredible 400 square feet per person in 1985 (about 37.5 square metres) to 250sq feet by 2010, although studies suggest in the US at least it has climbed again in recent years.

And there’s hotdesking which emerged in the late 1980s – designed to maximise space utilisation if not productivity – coworking in the 1990s, open planning and even the German ‘Bürolandschaft’, or office landscaping.

But these trends have tended to be gradual or localised, driven by commercial markets or corporate preference. COVID-19, however, has caused 81 per cent of the global workforce of 3.3 billion people have had their usual place of work either fully or partly closed.

So will the impact of coronavirus be just another change for the commercial property sector or are things serious this time?

Before COVID-19, what percentage of Europeans reported that they “never” worked from home? 

Source: Eurostat

For Baker Tilly’s real estate property group, the message from clients has been clear even if the path ahead is not — no one quite knows what the future for property will be.  

Instead, businesses are making the best guesses they can based on the reactions and needs of their own workforce, and how they can effectively manage a return to work.  

“There is a big question over demand and whether it will decrease for commercial office space, because now all the companies see that a home office works,” says Leopold Kühmayer, a property tax expert with TPA Austria.

“It has been a big experiment, but the result is that we can work from home offices and — while not everybody — some people really like it.”

Most European countries were in lockdown by mid-March, and at its peak more than 250 million Europeans were staying at home as most nations enforced limits on their citizens. Almost all non-essential workers from Spain to Finland were asked to convert spare space at home into their workplace as travel ceased and offices closed.

The move marked an enormous change in behaviour.

As recently as 2018 only 5.2 per cent of employed persons in Europe reported they ‘usually’ worked from home, but that figure has skyrocketed. A study in Spain found 88 per cent of companies had staff working from home in the past few weeks, compared to just 4 per cent before the crisis.

Workers adapting quickly to the enforced change. Users of Microsoft Teams soared to a new daily record of 2.7 billion meeting minutes in one day, while Zoom has gone from being used by 10 million workers a day to more than 200 million people.

Social distancing forced industries to adapt out of necessity and GPs have seen surges in patients accessing telehealth services. A company in Sweden has taken the concept a step further in developing FirstVet, a platform to connect vets and pet owners.

Music lessons and gym classes have helped adults keep up their skills and fitness in isolation but the needs of children have also been met. With schools and libraries closed in Estonia, Tallinn Central Library launched a new service allowing children to call in and have a librarian read them a book by phone or video chat.

It is not yet known how long-term the impact will be in countries where working from home is less common. In eastern European nations such as Bulgaria and Romania, less than 0.5 per cent of workers worked from home before COVID-19.

Andreas Griesbach is Head of Real Estate at Baker Tilly Germany and would normally be speaking to clients about tax advice. He’s seen the disruption caused by COVID-19 and the challenge for businesses to return to life as ‘normal’.

And he warns that what works for employers may not work for employees.

In Germany, about 8 million people, or 25% of the nation’s workforce have found themselves working from home, up from 12% before the pandemic.

Plans for legislation to allow people the right to work from home were revealed in late April that would allow, where possible, employees to request working from home on a more permanent basis.

But Mr Griesbach believes many employees will find the novelty of remote working wears thin.

“You can see a tendency in the last years for micro-living, micro-apartments, and people who actually don’t have big houses or big apartments anymore,” he says.

“And the question is, for those we are asking now to work from home, whether they are that happy. I’m lucky. I have a working space in my house and I can close the door and my kids are somewhere upstairs. But 80% of my colleagues don’t have that.

“So facilities are not yet perfect to be working from home.”

Firms may be tempted by the potential savings that come from abandoning office space but there are hidden costs in decentralising as well, Mr Griesbach says. Some of those costs could effectively be passed on to workers, but that raises other challenges for the longer term.

“At this stage, most companies are not implementing home offices the way they should,” he says.

“There is no subsidy for the electricity the work is using; there’s no subsidy for the internet. So at this stage, it’s quite easy for a company to say, well, it’s cheaper for me not to spend that much in rent.

“At the end of the day they will spend exactly the same amount of money in giving people a subsidy to deliver all the services at home I used to have at my office, so I don’t see at this stage that is really going to change.”

Mr Kühmayer says his clients normally focus on issues relating to tax. Now, however, their thoughts are as much occupied with the physical logistics of the office as the financial aspects.  

One option put forward by some employers is a reduction in the total space they need to lease, recognizing that a portion of the workforce will be remote at any given time.

At the same time, the total space per employee within an office might rise as health concerns keep workers social distancing.

Other changes that could be on the cards range from the changes to communal meeting spots like cafeterias to greater restrictions on how people move between floors. There may be more defined spaces within a given floor, moving away from free-flowing open plan, even the reintroduction of the cubicle.

Real estate group Cushman & Wakefield are toying with a ‘six-feet office’ where floor markings define the distance between workers and zones are marked as one-way to reduce interaction. The Perspex ‘sneeze guards’ in many shops could make an appearance at desks, while sensor doors and voice-operated lifts have been put forward as ways to limit surface contamination.

Whatever the physical change, Mr Kühmayer says financial cost will remain a key consideration.  

“A company will always reconsider the costs,” he says.

“But I am sure we will see changes in the future.”

It is not just the rush to ‘de-densify’ office spaces that will impact the property sector.

Mr Kühmayer says retail and industrial space will also need to be rethought, from how and where goods are manufactured and stored to how they are sold in a world where social distancing is required.

“Everywhere in the world, people have to think about the usage of buildings,” he says.

“How should buildings look like in the future, to make them more adapted to cases like this? What needs to change?”

He points to the retail restrictions in Germany, where the first stores to reopen were those smaller than 800 square meters, provided they maintained a limit of one customer per 20 square meters.

“How long do you think those places are going to survive? Maybe 50 per cent of the original clients are actually accessing the site,” he says.

Mr Griesbach says social distancing could bring about changes to the way we design supermarkets, for example.

“Ikea has a very simple concept on how to have people in their warehouse: you follow a route and that route is always the same,” he says.

“But if I go to a grocery store, I’m like a bee. I go from this to there and there and oh, I forgot something and then I go back.

“At Ikea you won’t do that because you’re led through the way how they want you to go.

“It will be interesting to see whether a grocery store in future will change that and present the products they have in a way that compels you to go one direction through the store.”

Tourism is another sector that has been devastated by the virus, with many hotels closed, even as others have reopened as homeless shelters or temporary housing for health workers, while entertainment venues have been turned into hospitals.

Recognising the pressure of working and living in tight quarters, a market of pop-up, one-person hotel offices has also developed, where even pets are allowed.

The changes will also flow-on to residential properties, Jake Luskin, Director of Services and Industries at Baker Tilly International, says.

For the world to move beyond dependence on the office, workers would need a place they could log in and remain productive, he says — a challenge in smaller apartments or homes.

“It could be that high rise residential properties are now all built with desks, because they expect that more people are going to work from home,” he says.

“That becomes a differentiator as the owner can charge a higher rent because they’ve planned ahead for what the world looks like when you work from home.”

For the property sector, the disruption represents opportunity, Baker Tilly experts say, but it will require careful thinking for developers and investors to pick which trends will shape the sector.

Mr Kühmayer believes it is an ideal time for businesses and advisers have a more significant conversation about real estate.

“When we have talked about real estate in the past, it tends to be at a local level. The question was always how to make it global,” he says.

“Now coronavirus has come and made this a global topic that impacts everyone, everywhere.”